According to official sources, the Government understands that developing the Lahore RMTS with a PPP would provide an opportunity to improve the overall efficiency of the system. A PPP provides the Government with an opportunity to efficiently allocate risks between the Government and specialised private firms.
This means that risks will be controlled and influenced by the party that is best placed to control and influence these risks.
A PPP, however, would not make sense for the Government or private sector if either party were bearing risks that are better handled by the other. This means that a well-structured PPP is essential to achieve the objectives expected from a PPP.
ADB experts citing examples of key issues that need to be resolved as part of structuring a PPP transaction, include the following:
(i) Public versus private funding. The passenger fares that the Government plans to charge for the green line will not cover the full cost of building, operating, and maintaining the line. The Government will need to subsidise a portion of the capital costs. What portion would be funded by the Government, where would these funds come from, and how would these funds be paid are key issues to be resolved.
(ii) Ridership risk. While the Government should bear part of the ridership risk, the private operator should also have incentives to maximise ridership. Thus the private operator should bear a portion of the ridership risk. What portion and under what terms are key issues to be resolved.
Prior to consideration of ADB project financing, ADB should update project reports mentioned. Engagement of a transaction advisor is required to formulate financial structuring, undertake detailed due diligence, and package the Lahore RMTS to attract private capital and management.
The transaction advisor, in close consultation with ADB and the Government, will help prepare and launch a PPP transaction for the green line. ADB is willing, in principle, to partly finance the public-sector-financed portion of the Project under the multi-tranche financing facility modality.
ADB experts disclosed that the transaction advisory work will be carried out in three phases: preparation, implementation, and negotiation. During the preparation phase, the transaction advisor will carry out technical and legal due diligence, design the detailed structure and terms of the transaction, market the transaction with potential investors, and develop prequalification and bidding documents as well as the necessary contracts.
During implementation, the transaction advisor will assist the Government in obtaining any approvals and permits required, pre-qualifying potential investors, carrying out the bidding process, evaluating proposals, awarding the contract, and holding negotiations with lenders. During the negotiation, the transaction advisor will support the Government and winning bidder reach financial closure.
PHASE I, TRANSACTION PREPARATION:
The transaction preparatory work will include technical, legal, regulatory, financial, and safeguards due diligence in support of the proposed transaction. The transaction advisor will lead efforts to market the transaction, including tasks such as (i) preparation of initial marketing document, an information memorandum, and presentations; (ii) preparation of a list of investors that have the qualifications and experience to be the project counterpart; and (iii) consultations with potential investors and lenders to share information about the Lahore RMTS. The transaction advisor will also advise on progress made in preparing the transaction; and review feedback on the design of the transaction. International road shows may be required.
Phase II, Transaction Implementation
The transaction advisor will assist the Government in obtaining or issuing the necessary permits or approvals needed for implementing the transaction for the Project. These might include approval to (i) create and fund a subsidy account, (ii) issue a government guarantee, and (iii) launch prequalification and bidding process. The transaction advisor will assist the Government in (i) issuing the request for prequalification, responding to questions from interested parties, evaluating the expressions of interest, and selecting a short list of firms; (ii) issuing the request for proposals and responding to questions from bidders; and (iii) assessing the legal compliance of the proposals, evaluating the quality of the technical proposals and competitiveness of the financial proposals, and making an award decision.
PHASE III, NEGOTIATIONS:
Following the award of the contract to a bidder, financial closure for the transaction will require several months. During this period, the transaction advisor will assist the prospective lenders of the winning bidder in carrying out their credit analysis and, to the extent needed, assist the Government in negotiating with these lenders.
It may be recalled that the investment cost of the TA project, to finance the recruitment of transaction advisor, is estimated at $7.5 million equivalent, including foreign exchange costs of $6.0 million and local currency costs of $1.5 million equivalent. The TA will improve the urban rapid mass transportation network in Lahore. The outcome of the TA is a structured design for the Lahore RMTS Project feasible for ADB financing.
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